Chesapeake Energy 1998 Annual Report Download - page 27

The Volatility of Oil and Gas Prices Creates Uncertainties.
Our revenues, operating results and future rate of growth are highly dependent on the prices we receive for our
oil and gas. Historically, the markets for oil and gas have been volatile and may continue to be volatile in the
future. Various factors which are beyond our control will affect prices of oil and gas. These factors include:
worldwide and domestic supplies of oil and gas,
the ability of the members of the Organization of Petroleum Exporting Countries to agree to and
maintain oil price and production controls,
political instability or armed conflict in oil-producing regions,
the price and level of foreign imports,
the level of consumer demand,
the price and availability of alternative fuels,
the availability of pipeline capacity,
weather conditions, and
domestic and foreign governmental regulations and taxes.
We are unable to predict the long-term effects of these and other conditions on the prices of oil and gas. Lower oil
and gas prices may reduce the amount of oil and gas we produce, which may adversely affect our revenues and
operating income. Because our 1999 business strategy is to generally match our capital expenditures for drilling
activities to cash flow from operations, significant reductions in oil and gas prices may require us to reduce our
capital expenditures. Reducing drilling will make it more difficult for-us to replace the reserves we produce.
We Must Replace Reserves to Sustain Production.
As is customary in the oil and gas exploration and production industry, our future success depends largely upon
our ability to fmd, develop or acquire additional oil and gas reserves that are economically recoverable. Unless we
replace the reserves we produce through successful development, exploration or acquisition, our proved reserves
will decline. Approximately 30% by volume, or 22% by value, of our total estimated proved reserves at December
31, 1998 were undeveloped. By their nature, undeveloped reserves are less certain. Recovery of such reserves will
require significant capital expenditures and successful drilling operations. We cannot assure that the Company can
successfully fmd and produce reserves economically in the future.
SignJIcant Capital Expenditures Will be Required to Exploit Reserves.
We have made and intend to make substantial capital expenditures in connection with the exploration,
development and production of our oil and gas properties. Historically, we have funded our capital expenditures
through a combination of internally generated funds, equity issuances and long-term debt financing arrangements
and sale of non-core assets. From time to time, we have used short-term bank debt, generally as a working capital
facility. Future cash flows are subject to a number of variables, such as the level of production from existing wells,
prices of oil and gas, and our success in developing and producing new reserves and in selling non-core assets. If
revenue were to decrease as a result of lower oil and gas prices or decreased production, and our access to capital
were limited, we would have a reduced ability to replace our reserves. If our cash flow from operations is not
sufficient to fund our capital expenditure budget, there can be no assurance that additional debt or equity financing
will be available to meet these requirements.
We May Have Additional Full-Cost Ceiling Writedowns f Oil and Gas Prices Decline Further or f Drilling Results
are Unfavorable.
The Company reported full-cost ceiling writedowns of $826 million, $110 million, and $236 million .during the
year ended December 31, 1998, the six month transition period ended December 31, 1997 (the "Transition Period"),
and the fiscal year ended June 30, 1997, respectively. These writedowns were caused by significant declines in oil
and gas prices during all three periods and by poor drilling results in 1997 and during the Transition Period.
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